Corporate biodiversity exposure and the market response to earnings announcements

Abstract

Biodiversity loss is increasingly recognized as a material financial risk to firms, yet little is known about how biodiversity-related exposure affects the way capital markets process earnings disclosures.We examine whether corporate biodiversity exposure (CBE), defined as the extent to which a firm’s polluting facilities are located near conservation-priority areas, shapes investors’ responses to earnings announcements. Drawing on the disclosure-processing-cost framework, we argue that CBE raises disclosure-processing costs at the integration stage by introducing spatially localized ecological and regulatory complexity, which makes it more difficult for investors to integrate reported earnings into valuation-relevant expectations of future cash flows. Consistent with this prediction, firms with higher CBE exhibit weaker earnings response coefficients, indicating attenuated market responsiveness to earnings announcements. These effects are amplified under greater ecological and regulatory uncertainty and attenuated in stronger information environments and under greater external monitoring. Exploiting staggered protected-area expansions in a stacked difference-in-differences design, we provide causal evidence that newly exposed firms experience a decline in earnings–return sensitivity. Overall, our findings identify biodiversity exposure as a place-based disclosure-processing friction and highlight how disclosure and governance shape the pricing of earnings announcements in the presence of ecological complexity.

Valuation Insight: Exposure to potential biodiversity loss affects corporate value. The paper shows that, when a firm’s polluting activities are close to conservation priority areas, it becomes more difficult for investors to identify how relevant reported earnings are for future cash flows. Market response to earnings surprises decreases markedly. Biodiversity risk is not only an ecological or regulatory concern, but also a factor that can impair price discovery in capital markets.